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THE ROLE OF THE EXCHANGE RATE IN A NEW KEYNESIAN DSGE MODEL FOR THE SOUTH AFRICAN ECONOMY
Author(s) -
Alpanda Sami,
Kotzé Kevin,
Woglom Geoffrey
Publication year - 2010
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/j.1813-6982.2010.01239.x
Subject(s) - dynamic stochastic general equilibrium , economics , new keynesian economics , business cycle , exchange rate , small open economy , open economy , monetary policy , context (archaeology) , interest rate parity , interest rate , variance (accounting) , taylor rule , output gap , monetary economics , keynesian economics , econometrics , macroeconomics , central bank , paleontology , accounting , biology
We build a small open economy New Keynesian dynamic stochastic general equilibrium model for South Africa similar to Steinbach et al . We abandon their assumption of complete risk sharing with the foreign economy, and introduce country risk shocks to allow deviations from uncovered interest rate parity. These changes allow us to include the exchange rate as an observable variable in the estimation of the model. Using forecast error variance decompositions and historical decompositions, we show that country risk shocks have sizable effects on the South African business cycle. We also explore the optimal monetary policy implications of our model within the context of Taylor rules.